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Cheap ‘teaser’ loan rates costing borrowers £194m

Which? explains how to get the best rate on a personal loan

Borrowers could be paying hundreds of pounds more than the best advertised rates for personal loans because they aren’t offered the rate they apply for, new research reveals.

Analysis from the Centre for Economics and Business Research (Cebr) for Shawbrook Bank found there is a significant gap between the rate advertised by lenders and the actual rate offered to applicants.

The research found the average representative APR advertised by UK lenders for a typical loan of £9,000 was between 2.8% and 5.5%. However, the typical APR secured by borrowers was much higher at 7% APR.

This means borrowers could end up with repayments that are 150% higher than what they budgeted for. Cebr estimates this is costing borrowers an eye-watering £194m each year.

Which? explains why lenders are able to advertise low rates but offer different deals, how to get the cheapest personal loan and the alternative options that could fit for your borrowing needs.

Why are lenders allowed to offer a different rate?

In the UK, personal loan providers advertise the ‘representative APR’ on deals. Confusingly, however, they don’t actually have to offer this rate to everyone that applies.

Lenders are only required to offer the best rate to 51% of applicants, meaning the remaining 49% that attempt to secure the deal may be offered a more expensive alternative.

The gap between the interest rates advertised by lenders and the rates being paid by consumers has widened significantly since 2011, according to Bank of England data – growing from 1% to 3%.

Source: Bank of England

Typically, the only way to find out which rate you’ll be offered is by applying. But before approving a loan, most lenders will do a ‘hard credit check’ on your record, creating a footprint on your credit report.

If you don’t get the rate you expect, you face a tough choice: take the more expensive rate or risk damaging your credit history.

Rejecting the offer and applying for a different loan else will put another search on your credit report. A large number of footprints in a short time period could impact your credit rating and cause lenders to view you as a risky choice.

How to get the cheapest personal loan

If you are thinking about applying for a loan there are steps you can take to give yourself better odds of securing the best rate.

Boost your credit score

To be among the top 51% offered the lowest rate, you’ll need to stand out from the crowd. So as a first step, you should check your all three of your credit reports to see if your rating is in good shape.